Modelling international tourism demand and uncertainty in Maldives and Seychelles: A portfolio approach

Maldives and Seychelles in the Indian Ocean are small island tourism economies (SITEs), both of which have relatively small populations, territorial sizes, land area and narrow productive bases. The two SITEs are surrounded by vast ocean and have an overwhelming reliance on international tourism for economic development. Variations in international tourist arrivals to these two SITEs have been affected by unanticipated oil shocks, natural disasters, crime and global terrorism, among others. An accurate assessment of the variations in international tourist arrivals, particularly the conditional volatility, is essential for policy and marketing purposes. The conditional mean and conditional variance of the weekly international tourist arrivals to Maldives and Seychelles from 1 January 1994 to 31 December 2003 for the five main tourist source countries are modelled. Multivariate models of uncertainty are estimated and tested. An assessment and interpretation of the estimates are made for policy makers and tour operators to reach optimal decisions on the basis of a portfolio approach to international tourism demand. The paper assesses four sets of country spillover effects between Maldives and Seychelles, namely (i) the own country effects for Maldives and Seychelles; (ii) the country spillover effects from the remaining four countries within each of Maldives and Seychelles; (iii) the own country spillover effects between Maldives and Seychelles; and (iv) the cross-country spillover effects between Maldives and Seychelles. The empirical results for both Maldives and Seychelles are discussed in terms of each of these components.